A reverse home loan, also known as a Home Equity Conversion Mortgage (HECM), allows homeowners aged 62 and older to convert a portion of their home equity into loan proceeds, turning part of their home equity into available cash. One question that often arises for borrowers is what happens to a reverse home loan after they move out of the property. Understanding the implications can help individuals make informed decisions about their financial futures.
When a borrower with a reverse home loan moves out of their home—whether due to selling the property, transitioning to assisted living, or moving to be closer to family—the loan becomes due and payable. This is one of the crucial conditions of a reverse mortgage. The lender typically requires full repayment of the loan upon the homeowner's departure from the residence, which is considered a "maturity event."
There are a few options available to borrowers at this juncture:
1. **Repayment**: The borrower or their heirs can choose to repay the reverse mortgage in full. This often involves selling the home to cover the loan balance. If the market conditions are favorable, this can be a feasible route, as the sale proceeds may cover the outstanding loan amount while potentially leaving some equity for the borrower or their heirs.
2. **Selling the Home**: If the borrower or their heirs opt to sell the home, they must ensure that the sale covers the reverse mortgage balance. If the home sells for less than the amount owed, the Federal Housing Administration (FHA) insurance protects the lender, limiting the burden on the borrower’s family. They will not owe more than the house's current market value.
3. **Refinancing the Loan**: In some cases, if there is significant equity in the home, heirs may consider refinancing the reverse mortgage into a traditional mortgage. This allows them to keep the property, although they would need to demonstrate adequate income to qualify for the new financing.
4. **Non-recourse Loans**: Most reverse mortgages are non-recourse loans, meaning that the repayment amount cannot exceed the value of the home. In such scenarios, if the borrower or their heirs decide not to repay the loan, they can surrender the home to the lender, and this would serve as full settlement of the reverse mortgage, alleviating further financial liabilities.
It is essential for borrowers and their families to have a plan in place and be aware of the implications when moving out of a home with a reverse mortgage. Consulting with a financial advisor or a housing counselor certified by the Department of Housing and Urban Development (HUD) can help in navigating these options, ensuring that the decisions made align with their overall financial goals.
In summary, a reverse home loan requires careful consideration when it comes time to move. Repayment options exist, and with proper planning, the transition can be managed smoothly, minimizing potential pitfalls associated with the loan.
